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Wednesday, April 30, 2014

The Fed is fighting deflation, can it win?

Deflation has a bad rap.  I think deflation has a bad rap harking back to the gold standard days.
In those days, when deflation took hold, countries could NOT print fast enough to counter its effects.

In essence in classic deflation, people horde money and don't spend it.
That starves the entire economy, resulting in people working more for less in a never ending death spiral until the economic situation hits rock bottom.

In such situations, people with cash (banks, the rich) rule the world as they take control over much more pennies on the dollar.  If you seen the movie its a wonderful life, that is what a deflationary collapse looks like.

But like so many words, they can be used for many different things confusing situations.
Deflation can also be used to describe falling prices.  While that looks on the surface to be same deflation as I just described, it may not.

Take assets like stocks and houses.  If housing goes down by 90% in price, young adults can buy houses they cannot afford now.  In effect standard of living for buying assets such as houses goes up.  Who suffers are those who already own a house, their savings goes down.  In addition if houses have larger loans on them than the face value, banks will get stuck with the houses, causing losses not only for the home owner, but the loan holder.

Depending how you look at it, housing prices collapsing is very good for humanity, for more can afford with less.  But in production such as making good or houses, lower prices result in lower wages or fewer jobs to create the items for consumption.

As for houses, if USA didn't build an epic ponzi scheme since 2001 on real estate, I can say with confidence lower house prices is good for humanity.  The ponzi-like scheme we have built on perceived value of houses unfortunately, make it not as clear as what is the best thing for society.  Hence in comes the Federal Reserve bank where 'status quote' for the financial markets is of utmost importance.  For the Federal Reserve bank is a  PRIVATE institution with the health of the banking system front and center.

What we have seen since 2008 is an attempt to stabilize the prices and restore valuation before 2008 collapse.  As I have just pointed out, this is at a cost of the 15-35 year olds in society.  We can see the effect between jobs and living costs of that generation taking it square on the chin.

The question is, can this go on forever? The answer is simply, no.  There are two forces at work that will make the reality of housing go down, and with it other over-inflated assets.  The first and foremost is demographics.  as the 35 year olds become 40, 45, 50, etc the needs of the older will succumb to the younger.  The asset protection for the older simply becomes less important demographically as that generation dies off.  The fiscal balance sheet shifts not only in who owns the assets, but the overall support of the system as the older generation stops working and the younger force at a fraction of the income replace them.  Mathematically something will give.

There is a second force at work, technology.  I have posted about 3d printing of all shapes, including houses.  I read an article today bringing housing one step closer to a price collapse.
A 3d house printer can make 10 houses a day for cost of $5K each.  The house of course, is basically a concrete shed, hardly the American dream house.  But here is the rub, its 2014, what will that printer do in 2020? I am positive in 6 years for $5K not only will that house have more than 1 room but it will have plumbing and pipes to run wires to install electric, a fireplace, and other basic needs.  by 2030, it will print the american dream house for maybe $100K or less in today's dollars.

Once we can print as many new homes as you want at a fraction of what houses cost today, what will old houses go for? Sure, by location it will vary greatly.  Desired areas have value not because of the house build cost, but because your buying into a neighborhood.  But for many areas I predict a Detroit-like exodus issue as a potential.

Combine this with 3d printing as seen below you destroy the need for many objects to be made at all, and many made locally right in your house, destroying the needs for millions of cheap factory workers.

There is NO QUESTION, massive deflationary forces are at work, and the FED wants to keep the status quo, I predict it can't hold it forever, between now and 2017 the cracks will become apparent to all.

And the next currency must be deflationary matching the technology and demographic needs, not inflationary as current currency is.  I believe a virtual decentralized currency will meet that challenge.

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